Market outlook now points to sustained MF and retail investor interest into 2026, supported by easing crude oil prices and solid consumer confidence, as evidenced by steady volume demand in Q4FY26 corporate earnings and consistent monthly GST inflows.
Midcap stocks are trending upward, with the Nifty Midcap 100 Index reaching new highs. Early signs suggest a potential multiyear breakout following a 20-months of consolidation period from Sept 2024. Key reasons have been premium valuation, down in corporate earnings, FIIs selling, hawkish monetary policy and rise in geopolitical risk. Notably, FIIs have significantly reduced their selling activity in May, and—for the first time—DIIs buying has more than offset overall selling pressure. Mutual funds, alongside retail investors, have re-entered the market following a period of subdued sentiment seen in March and April when retail investors profit and loss booking heightened as the Middle East crisis escalated. Market outlook now points to sustained MF and retail investor interest into 2026, supported by easing crude oil prices and solid consumer confidence, as evidenced by steady volume demand in Q4FY26 corporate earnings and consistent monthly GST inflows (Net 2.1lac cr in April). However, several factors could pose challenges ahead, including heatwaves, weak monsoons, lingering effects of high crude prices on corporate earnings, geopolitical tensions, tight monetary policy, and ongoing inflationary pressures both globally and domestically.
Despite current challenges, the outlook remains cautiously optimistic. If the trend of FIIs selling in India reverses in the coming years, the resulting upside could be substantial; otherwise, returns may remain moderate. It is premature to draw definitive conclusions regarding FIIs’ short to medium-term perspective on India, as they have continued purchasing assets in other Asian markets while divesting in India. The recent reversal observed in May largely stems from a significant decline in crude oil prices toward $100 per barrel̥. The prospect of peace in the Hormuz region may further support lower crude prices, which would be highly beneficial for India given its reliance on imports for 90% of its crude requirements. However, there are still risks—even if crude prices fall below $85, the incremental impact may be negative for India compared to FY26 average price of ~$70 per barrel. Provided conditions remain favourable, the majority of these effects will be evident in Q1FY27, with subsequent periods potentially seeing decreased operating margins pressure.
Following the recent state and union elections in India, markets are speculating on a possible increase in retail fuel prices amid a sharp rise in crude oil prices on a YoY basis of 60%. Concurrently, it is anticipated that increased central government spending and state policy reforms in the eastern regions, particularly West Bengal, could drive prosperity among listed companies and major business players in the area. While a potential hike in fuel prices might have a short-term impact, policy changes are expected to generate long-term optimism, possibly leading to a re-rating of valuations as new business opportunities arise.
Along with better net inflows (thanks to ongoing local investments and less selling by foreign investors) and drops in crude prices, other reasons for midcap performance include stronger-than-expected corporate results for Q4FY26, technical recovery from oversold territory, and lower valuations. The one-year forward price-to-earnings ratio for midcaps has fallen below the five-year average of 26x encouraging the ongoing upside. However, the recent rally has again elevated India’s midcap valuations relative to large caps, with the premium exceeding 50%. The renewed optimism is expected to persist in the short term due to these underlying tailwinds. But for this momentum to be sustained, two key developments are necessary: a reversal in FIIs’ sell strategy in India and a reduction in earnings setbacks estimated for H1FY27.
First published in Mint.